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8.
Patent Valuation
The Three Basic Valuation Methodologies
A. Cost -
Based on cost to replicate, e.g., independently develop (less
functional or economic obsolescence)
Advantage: Easy to calculate
Problems:
No relationship to utility or market value
Independent development is not a defense to patent
infringement

16.
Patent Valuation
Monte Carlo Analysis
Refinement of Income method
Assigns a range of values to variables used in calculating NPV, e.g.,
Price variables: price premium, additional unit sales
Cost variables: COGS, SG&A
Assigns a probability to individual values within a range -
Probability distributions: uniform, triangular, normal, log-normal
Calculation of NPV is repeated 500-1,000 times based upon random selection of probaility
weighted values assigned to each variable, multiple NPVs are then plotted by frequency
of occurrence, indicating most likely NPV
Accuracy of NPV values is no better than accuracy of value ranges and probabilities
assigned to individual values.

17.
Patent Valuation
Real Options
Based on Black-Scholes formula for valuing stock options -
Five variables: (a) remaining development cost to commercialize IP; (b) mean
market value of products embodying similar patents; (c) time until commercial
utilization; (d) product value volatility; (e) risk-free rate of return; (f) patent
expiration
Option value resides in right to wait and see what happens to stock
price and to exercise or not based thereon
IP investment is viewed as an option to develop the IP further or to abandon it
depending on future technology and market information
RO is most useful for IP investments with long-term returns and high risks because it
recognizes that risk of IP investment is not uniform over time but decreases as additional
technical and market information becomes available

19.
Patent Valuation
Mapping the Black Scholes variables from the stock call option space to the
patent value space --
• C becomes the present value of the patent(s)
• S becomes the value of the underlying commercializable technology (“market-driven mean
enterprise value per product at launch”) – supplied by market data in the form of “other ‘pure
play’ companies with products in the same technology niche as subject patent”
• X becomes the remaining development cost to get to commercial product (covered by patent) –
supplied by patent owner
• τ becomes the remaining development time until launch of product (covered by patent) – supplied
by patent owner
• σ2 becomes the variance of product value (ROI) vs. time
• r (the risk-free rate of return) remains the same

20.
Patent Valuation
Take Away:
The best that can be said about current methods of IP valuation is
that they are better than nothing -
(but how much better is a matter of substantial disagreement).
“It is a sign of an educated mind not to expect more certainty from a
subject than it can possibly provide.” (Aristotle)
“Valuation requires an intermediate perspective between ignorance and
certainty, involving the exercise of skill, experience and judgment”
(Razgatis)

21.
Patent Valuation
So, what about the role of claims construction? --
Present quantitative valuation methods are essentially actuarial in nature:
i.e., they deal with individual patents, and patent portfolios, on a
semi-statistical basis, approximating value based on comparison
with past transactions involving similar patents, or using analogies
to other kinds of intangible rights (e.g., stock options).
In the future, economists and patent lawyers will work together to create a
valuation that better reflects the exclusivity domain, i.e., the market, defined by
the patent claims.